Tuesday, March 13, 2012

Did Government Policy Cause the Financial Crisis?

Reason.tv -- "AEI's Peter Wallison argues in the video above that the financial meltdown was largely a consequence of government housing policy that underwrote unsustainable economic activity. He draws heavily on the research of Fannie Mae's former chief credit officer, Edward Pinto (now at AEI), which found that federal housing agencies drastically underreported the number of high-risk mortgages on their books. According to Wallison and Pinto, there were about 28 million high-risk mortgages in the U.S. in 2008; roughly 70 percent of those mortgages were owned by government-sponsored enterprises such as Fannie Mae and Freddie Mac."

Grouch: The jury will probably always be out on this question. There'll never be a definitive answer, just a lot of competing theories shaded by political agendas. My own personal belief is that government provided the fertile ground for the banks, mortgage lenders and Wall Street firms to plant the seeds of greed and recklessness. No one area is completely responsible, but collectively they are all responsible. While it is a noble goal for the government to want to increase home ownership, this policy often results in distortions of lending standards and perverse incentives that lead to malinvestment and people in homes with mortgages they can't afford.

1 comment:

  1. My view is that the Fed caused it. If they had kept Fed Funds at 3% in mid 2003 instead of pushing it to 1% in the midst of a strong housing market we wouldn't have had the housing bubble. We would have had the typical slowdown and mild recession but nothing like we had. Controlling Fed Funds is a form of price control. We learned nothing from the experience of the Soviet Union and other episodes of price controls. It continues today and will lead to more of the same although even worse.